Hang Seng may add red chips, private companies in H-shares index revamp

Hang Seng Indexes Company will announce as early as August the final plan on the inclusion of red-chip stocks and private Chinese enterprises in the Hang Seng China Enterprises Index for the first time, according to the equity index compiler.

“We are seeking views from market participants. Initial feedback is encouraging,” Vincent Kwan, director and general manager of Hang Seng Indexes Company (HSI) told the South China Morning Post.

The company, which is Hong Kong’s main index compiler, has recently proposed to add the so-called red chips and private Chinese enterprises, or P-chips, into its widely tracked Hang Seng China Enterprises Index (HSCEI), which is also known as the H-shares index. The index was launched in 1994.

Red-chips refer to state-owned Chinese companies that are incorporated outside of mainland and listed in Hong Kong. P-chips are private Chinese companies that are incorporated internationally, most often in the Cayman Islands, Bermuda and the British Virgin Islands.

Kwan said it takes several months to talk to market participants and analyse their responses about how many red-chips and P-chips should be added. Another important issue is the selection criteria for inclusion.

“If they are supportive of the proposal, we will announce the final plan in August,” Kwan said.

The HSCEI currently only covers H-shares, which are state-owned Chinese companies incorporated on the mainland.

However by the end of 2016 H-shares accounted for only around one-third of the total market capitalisation of Chinese enterprises listed in Hong Kong. They are also dominated by mainland Chinese banks, insurers, and oil and gas companies.

“We want to enhance the index to provide a more representative China index of the Hong Kong market and include more ‘new economy’ stocks to reduce the weighting of financials,” said Kwan.

The current weighting of financials in the HSCEI is around 71 per cent.

In the past decade, a large number of Chinese private companies have been listed in Hong Kong in a broad range of industries such as IT, consumer goods, real estate and construction.

“Red-chips and P-chips cover more ‘new economy’ stocks, so including them will broaden the diversity of industries covered,” Kwan added.

Among proposals being considered, the HSI will keep the number of H-share constituents unchanged at 40 and then add red-chips and P-chips “gradually” during the regular quarterly review.

“It will be a gradual and slow process, ” Kwan said. “We don’t want big, sudden changes.”

“At the initial state, we will add a small number of red-chips and P-chips,” he said.

As for the selection criteria, Kwan said they will look at a number of factors rather than just focusing on market capitalisation.

These factors include the representation of the industry within the HSCEI and risk-related parameters, such as financial performance, price performance, volatility of the share price.

Kwan also said they will try to minimise the potential rebalancing impact by limiting both the number of constituents and maximum weighting of constituents to be added in each quarterly review.

“We hope the Hang Seng China Enterprises Index could better represent the Chinese economy and continue to attract strong interest from international investors,” Kwan said.

He said if the changes go through, the index would become home to multiple types of listed companies.

“The index can no longer be called the ‘H-shares index’” he added.